Question

A 5.5 percent coupon rate $1,000 bond matures in seven years, pays interest semiannually, and has a yield to maturity of 6.23 percent. What is the current market price of the bond?

Answer 1

I think I got this right $959.09

Answer 2

959.09

Step-by-step explanation:

This bond will give 5.5% on the bond par value of 1,000 but this is done semi annually. So, we need to divide 5.5% by 2 and 6.23% by 2 as well (because these percentages are per year based).

"n" should be 14 here because "n" is the number of periods instead of years. Since this is paid 2 times a year so total periods will be 7 yrs x 2time =14 periods.

Formula will be used as :

[Cashflow/(1+r)n] + [(Cashflow*5.5%/2) x (1- (1+r)^-n)/r]

[1000/(1+6.23%/2)^14] + [(1000*5.5%/2) x (1-(1+6.23%/2)^-14)/6.23%/2].

Hope this will help you out.